# Supply - Supply How do I derive a supply curve Suppose...

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Supply How do I derive a supply curve? Suppose, somehow, we know what the total costs of production are for all the various units of output. Maybe we hire some engineers and they tell us. If we produce one unit of output it will cost \$1. If we produce two units of output, it will cost \$4. .. From this information, we can calculate marginal costs Units of Output Total Costs (TC) Marginal Cost (MC) 0 0 ---- 1 1 1 2 4 3 3 9 5 4 16 7 5 25 9 We go about calculating marginal cost (MC) the same way we calculated marginal value. Marginal cost is defined as the change in total cost associated with producing one additional unit of output. For example, if the total cost of producing 3 units of output is \$9 and the total cost of producing 4 units is \$16, what is the MC of producing the 4 th unit of output? It is the additional cost associated with producing the 4 th unit, so \$16 - \$9 or \$7. The principle of rising marginal cost - the higher the rate of production, the higher the marginal cost of producing an addition unit of output. Notice how this looked in the document example. Below, for kicks, I have plotted the values of MC for the various levels of output MC (\$ / unit) \$10 MC \$8 \$6 \$4 \$2 1 2 3 4 5 Quantity of output Assert a decision rule - firms choose to produce at a rate such that marginal cost is equal to the market price of the good. Suppose P = \$7. Firms choose to produce where MC = P (= \$7). This occurs at 4 units of output. Thus, for P = \$7, Q = 4. Suppose P = \$5. Firms again choose to producer where MC = P (=\$5). This occurs at 3 units of output. Thus, for P = \$5, Q = 3. Repeat. ..if P = \$3, Q = 2. If P = \$1, Q =1. Thus, we have the relationship between price and quantity supplied that we are looking for (a supply curve).

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Suppose I were to now plot these price and quantity combinations. I have plotted them below. Does the picture look familiar. It should, it is simply the MC curve re-labeled (see previous page). Price (\$ / unit) \$10 Supply \$8 \$6 \$4 \$2 0 1 2 3 4 5 Quantity of output A supply curve is the same thing as a marginal cost curve . Just like a marginal value curve turned out to be a demand curve, the marginal cost curve turns out to be a supply curve. The supply curve shows us the relationship between price and quantity supplied.
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## This note was uploaded on 04/03/2011 for the course ECON 201 taught by Professor Kan during the Spring '11 term at University of Regina.

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Supply - Supply How do I derive a supply curve Suppose...

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